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Facing foreclosure can be overwhelming and scary, but by taking the right steps, you may be able to keep your home and protect your credit. The following information is provided to provide you a better understanding of loan modifications.
Overview of Loan Modifications
One of the best options available to struggling homeowners and lenders alike is a loan modification.
A loan modification is beneficial to the borrower because it allows the individual or family to remain in their home and offers them loan terms that work better for their particular lifestyle or situation. A loan modification, compared to foreclosure, bankruptcy, or some other options, allows the borrower to keep his or her credit score intact.
Loan modifications are also beneficial to banks and lenders, especially with foreclosure rates rising over the past few years. Banks lose a lot of money in foreclosure. Not only does going through foreclosure cost money but it is often an overall loss for banks, as homes are often sold for less than their value or less than the outstanding loan amount.
In a CNN report on March 6, 2008, America Mortgage’s Bob Moulton said, “It’s cheaper for a bank to renegotiate payments than it is to chase someone down and miss a monthly mortgage payment.” This is absolutely true; Banks lose more than 50 cents on the dollar on homes sold through foreclosure auctions.
Loan modification is a long-term solution that will help the borrower pay off his loan and stay in his home. This can be accomplished by:
reduce interest rate
converting from a variable to a fixed rate mortgage
Extension of loan tenure (period for the borrower to pay back the loan)
switching to a different type of loan entirely
Some types of loan modifications are more easily obtained than others. One of the easiest ways to modify your loan is to ask for a reduction in the interest rate. Most lenders are willing to aggressively reduce interest rates for qualified applicants. The reduced interest rate can save you anywhere from a few hundred dollars to well over a thousand dollars per month; It depends on the amount of your loan.
Moving your loan is another way to modify, which is often not difficult for a lender to accomplish. A homeowner can lower your monthly payment by a few hundred dollars by increasing the number of years you have to repay the loan. However, it should be noted that this option increases the total amount of repayment as additional interest accrues over the extended tenure of the loan.
A principle balance reduction is the most difficult loan modification to obtain. In this, the lender waives off a portion of your loan. It is very difficult to get a lender to agree to this type of modification, because the lender has to report that money as a loss on its balance sheet and the purpose of the loan mode is to minimize the loss.
Background on Loan Modifications
Sub-prime mortgage practices are largely responsible for the current crisis. In the early part of this decade, mortgage lenders made huge profits by lending money to borrowers with questionable credit histories. The booming housing market and the availability of easy credit perpetuated a cycle of refinancing whereby a borrower who could no longer afford his monthly mortgage payment could simply refinance into a new mortgage; Often at a lower teaser rate.
Once the housing market ground to a halt, however, sub-prime borrowers found themselves unable to refinance. This led to a record number of foreclosures. As a December 2006 New York Times article reported, “Nearly 1.1 million homeowners who took out sub-prime loans in the past two years will lose their homes in the next few years.” The article further states that, “Foreclosure would cost those homeowners an estimated $74.6 billion, primarily in equity.”
Recently, a new wave of problems has arisen with so-called Alternative-A loans. These Alt-A loans were very popular over the past several years among self-employed borrowers or people with declared income. Many individuals who have obtained Alt-A loans have been unable to stay current on their mortgage payments, especially those loans adjusted for higher interest rates. With declining housing prices, borrowers are finding themselves upside down and actually owe more on their loan than their home is worth.
If you are facing a serious financial crisis, contact Western Capital today foreclosure@mycollector.com
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